Sun Country, Inc. (SNCY) Earnings Call Transcript & Summary

Sun Country, Grant, so much thanks for being here.

Thank you. Appreciate the invitation.

Absolutely. So we're starting with everyone asking about the demand environment kind of as they see it right now. Obviously, you guys are a very unique airline in the way you are structured. So maybe for those in the room who are not as similar with Sun Country kind of give us, a, start little bit of an overview of your 3 segments and then maybe talk about what you're seeing out there in terms of each of them.

Absolutely. Thanks, Ravi. Yes, so Sun Country is unique airline, diversified across 3 segments: scheduled service, charter and cargo. Scheduled service is the largest Charter and Cargo make up the other 2 prongs. All 3 really work well together; in many cases, are integrated. And so the airline has been around for 40 years. I feel like we've really gotten closer to full potential here in the last few years as it's all coming together. And we've had some big news on the growth front for 2025, really excited how 2025 is shaping up for us that diversification regardless of sort of what happens in the broader economy. I think we're really excited about growing the Amazon relationship next year. Today, we fly 12 airplanes on a dedicated basis for them. That moves to 20 next year and that's all of their 737-800s domestically. And so that was a win-win sort of opportunity that we were able to solidify earlier this year. On the scheduled service side, we had a really good 2023; came into '24 with a lot of planned growth and very excited about the environment and our commentary would have been consistent with other carriers. But recently, we've sort of seen the uptick, again consistent with what others are seeing.

Got it. Let's kind of expand on that last bit a little more. Again, you're a little bit of an unusual seasonality compared to some of the other airlines. But based on what you would expect, what are you seeing kind of the post Labor Day kind of going into holiday season environment like that?

Yes, we're feeling -- and again, I think the context here is really important. So we do have, as Ravi indicated, a really sort of unique seasonality. Our peak quarter is the first quarter, North-South flying from the Upper Midwest, predominantly Minneapolis to Sun destinations, leisure travelers. And so as we came in to 2024, we had grown the airline more than we had, frankly, in any other time frame. And we were really bullish on the first quarter. We delivered a really good absolute first quarter, but I will tell you that we just -- it felt like something was a little bit off. So I feel like because we saw that peak before others did, we were a little bit more tuned into what was going on. And so we made some capacity adjustments, frankly, I think largely before the rest of the industry followed. So we took the back half down pretty aggressively in the mid-May time frame. And so we sort of, I think, had a pretty good sense for what was coming. And now the bookings, especially of recent, have really sort of turned around and the fares that we're booking today and just recently for the back half of the year, we feel good about those as they comp versus last year. And I think it just gives us a lot of positivity as we go into '25.

Got it. To your point, I think you were the first airline on the 1Q call to put up your hand and say, hey, this is a problem. We're going to take things out, everybody followed you in 2Q. But also to your point of, you've been very aggressive in taking out capacity in the back half of the year, is it fair to expect that you may see the best RASM gains out of as a result of this and also what are you seeing in terms of RASM? You've heard from a number of airlines in the last 24 hours, 48 hours, that RASM has inflected positively in September.

Yes. So I think we will be -- I expect our relative results to be strong. They typically always are. We do have some moving pieces. Our stage lengths increased year-over-year. So on an absolute basis, it may not be exactly there. But no, I do feel good about our returns. The other thing that's been really notable about us is the cost side, while we have grown the airline, we've taken pressure on the unit revenue side, but the cost side has been really, really strong. And I think that just speaks to the capabilities of the airline to sort of be productive. We've talked about there's more opportunity to fly the fleet and do that in a really efficient manner and that sort of borne itself out. So I think, like I said, our expectations for the back half of the year are consistent with others. And I think on some metrics, we're going to be really happy with how we compare relatively speaking.

Got it. And just last one on this topic. Given your unique seasonality, kind of do you have any visibility into 1Q already at this point? And kind of how is that shaping up versus expectations?

Yes. And as we grow 2025, it's really important to note that the Amazon growth sort of loaded up for the second quarter and beyond. And so we still will grow the scheduled service business in the first quarter. That's absolutely our intent. We feel good about it. We see our core leisure markets turning on consistently with how they have because last year, the one thing -- and we didn't use it as an excuse or anything, but we had a really sort of tough weather comp as well as growing the airline. It was the warmest winter on record in Minnesota with very little snowfall. So what we're seeing now, based on sort of that and just normal booking patterns, like I said, we're really bullish on 2025.

Right. That's great to hear. Maybe switching gears to the Cargo segment. Obviously, congratulations kind of on the Amazon expansion and extension of the contract. Again, for those who are unfamiliar with that, can you just give us a very quick overview on exactly what happened here and kind of how those new aircraft are going to kind of come on through 2025?

Yes. So we have a very good relationship with Amazon. It used to be that the 20 737s were divvied up between us and another party. And so we always had sort of -- we were always open to that opportunity. And I think as we came into 2024, there was just this unique opportunity based on what was going on in the world to make this happen. We were never going to do the deal sort of if it wasn't a win-win. We knew there were some things we wanted to get out of the -- in terms of just updating the terms and those sorts of things. And to the degree we were able to do that, we consummated the deal. And those airplanes as we expect them to come on, they start sort of, like I said, there's some deliveries that are potentially slated for first quarter, but very much weighted to second quarter and the back half of the year. So as we build our plan for 2025, we're taking that into account. I think we're as agile and as dynamic as any team in the industry to the degree those dates move around. We will be able to adjust. And if they go forward, we'll be able to get the pilots for those and take them out of the other lines of business. If they move by even a week, we'll take advantage of that as well. I'd call into like airplanes that come in July, if it's 1 week off, I know as we build our summer plan, we're going to say, hey, if that airplane is a week late, let's make sure that we can get all the peak flying we can in there. And so -- and then the contract itself, sort of as airplanes come the new rates, you would have seen in the 10 -- the stuff we put out this summer, the rates did have a step-up in the June time frame. And as these airplanes come in, we get to steady state in '20 -- by 2026, our expectation is the Amazon flying will be at a consistent profitability level to our scheduled service in 2023, which for us was kind of a banner year. We were really happy with that. So we're really excited about this flying. And while we will -- we are at our best when we have to optimize pilot resources across our lines of business because we get as much value almost as much as I think you possibly can with sort of lead times in the airline business. So we're set up for success in '25 and even because we expect to be a little bit smaller on the scheduled service side to accommodate that Amazon growth, we don't expect it to impact our brand, our market share or anything else predominantly in Minneapolis, our biggest base of operations.

Got it. Just a follow-up on that. You said kind of you took advantage of the Amazon change to update the terms of the contract. And a large part of that, to your point, was to restore the profitability to be similar the scheduled service business. Is that something that kind of flips on like a switch? Does it ramp up between now and now and then the [ nomination ] of the contract?

It ramps up. So like I said, the first component turned on in June of this year and then it ramps up with the delivery of the airplanes, we have normal escalation in the back -- in the December time frame. So that's why I sort of say by as we get through '25, we're all the way there. And so it's fully in in '26 when it will be in for -- our expectation is that it will be fully baked in the 2026 time frame.

Got it. And you also pushed the extension of the contract out for the mid-30s. Is that now like a locked-in steady-state business? Or is there opportunity to revisit that either in terms of unit economics or maybe even upsize the fleet between now and then?

I think as we think about it right now, it's locked in. It's a 20 airplanes and that's how we're building our sort of every case, be it next year's budget, longer-range plans. And we feel really good about that. I think the one thing that's really starting to take hold is that we have these 3 lines of business, and they give us the ability to not take on full risk in any one of these entities, but we're also getting really good integration benefits. There's a really unique stat that when our pilots do a multi-day trip, the majority of them will touch more than 1 line of business in any given trip. So we're starting to get really good synergies and certainly, between the scheduled service side and the charter side, we have really strong schedule integration, asset integration that allows us to be very successful in those, more successful than what a stand-alone charter airline would be. And frankly, I'd say more successful than a stand-alone scheduled service special leisure operator scheduled service airline can do.

Got it. You touched on the fact that you're looking to fly a smaller scheduled service operation next year. Can you remind us again what is the ideal mix of revenues across -- or block hours across the 3 segments and kind of -- obviously, there are many ways you can get to that ideal mix. And so what's going up and what's going down?

And I think -- so next year, certainly, Amazon is going to be the growth entity. Scheduled service, we will accommodate the growth largely through scheduled service. Our charter line of business is predominantly long-term contracts. So that sort of falls into kind of a similar framework is Amazon, where those lines of business kind get first take at pilot resources. We like that, though, because they're very consistent businesses that fly, not only they fly every month of the year, and that's really beneficial to us where we see so much fluctuation in demand on the scheduled service side of the business. So -- and we're like I said putting together our 2024 plan now. When we first came out with the Amazon deal, I know we had said that the scheduled service reduction would be a certain amount, and we're still working through that. I don't think it's going to be quite as high as what we initially said.

I think you said 8 to 12 maybe towards the end of the...

Yes, it will be, yes. And the one thing I will say is that the team is as good as -- we are very agile. So it's sort of like what's our optimal mix, it's sort of like will tell us what we should expect from scheduled service yields, ad hoc business, what's the military going to be doing. And we take all that calculus in and the team does an unbelievable job of adjusting on the fly. We can make those adjustments. So I feel really, really good about where we are right now.

Got it. Speaking of the military and some people are wondering why we're talking about the military, kind of let's talk about the charter business. Remind us again what percentage of that business is fixed long-term contracts versus ad hoc stuff? And where would you like that to go over time?

So we have really been focused on building the fixed long-term program side of the business. So any -- right now, it's sort of running in -- kind 70% to 80% of it are these long-term arrangements with casino operators, MLS is a really big customer of ours. And what's nice about that is those schedules we know we get them into our pilot bids. So they're really efficient from sort of a resource perspective. But I will tell you, even as we were sort of growing the airline considerably in the second quarter, just based on what we were seeing in terms of the economics, we were very predisposed to going out and working with our ad hoc customers to say, hey, in a couple of weeks, we have the ability to adjust our schedules. We would love to get that ad hoc business. So you'll see this year on a year-over-year basis even while we were growing scheduled service, we did do a really good job with growing the ad hoc nature business on charter. The other thing I will say is that the team has done a really good job this year, going back to some of our long-term customers and adjusting rates terms, those sorts of things on some of the charter contracts similar to the Amazon contract. We haven't been as broadly or loudly communicating that, but our charter profitability has been much improved this year versus last year because we have really good relationships with our customers. And the one thing that we found in some of these businesses that have long contracts with them. They didn't reflect the inflationary environment as well as we have annual escalations in place but some of the inflation that happened in the post-COVID time frame, sort of superseded some of those contracts. We did a really good job, and our big customers were good partners. And so you've definitely seen that if you dig into our numbers that our profitability on the charter side has improved year-over-year.

Got it. Just on that note, I mean there's been some reports of more competition in the charter space. How do you see that evolving? And do you think that's a transitory thing or do you think that makes sense?

I think it's transitory, and you see a lot of movement in that space. One of the big operators sort of -- they're still around in some fashion, but there's been some adjustment there. So -- and we're really nimble, we can adjust as needed. I feel like the big contracts we have, the big customers we have, we really bring them something that's very unique, we're big enough to be able to say like I think about MLS who has 30 teams at any given weekend, we're carrying all of them. We're big enough to be able to handle all that flying, we're also small enough that if they need something from us, they can call me, they can call. They can get a lot of access within the company. So I think that makes us really unique and gives us some strong barriers to others just coming in and trying to take those lines of business from us.

Are you thinking about the World Cup in 2026?

It's funny because we've done so much with MLS when the Leagues Cup happens, we worked very closely with them this year, which for our airline is a huge complement. We took every single one of the Mexican team's home and that may sound easy, but that's -- you play this game. If you lose, you go home. If you win in this game, you go somewhere else. And we took every single one of them home. Part of our sort of work with MLS, we had worked on the components of that deal year-over-year. And so again, we made it a win-win. But that's just an example of that ad hoc flying that the airline win it wants to can very admirably carry. So yes, we're predisposed to that. If you look through, we're the largest narrow-body charter operator in the country on a block hour basis. We -- one part of the business that we don't do a whole lot of is sort of high-end VIP professional sports, we've evaluated that. There's nothing to report now, but we sort of know where our white spots are, and we keep connected to the marketplace.

Just switching gears to the cost side of things. Obviously, like your peers, you've been hit by pretty significant inflation to your point. You kind of heard some of the economics and the long-term contracts that you've since restructured. Where are you on the cost side kind of just kind of pilot inflation, kind of crew inflation. Do you think CASM-X is now in a stable place, I know, in a world where RASM is now starting to improve?

So I think I would love to say yes to that, being sort of unique at Sun Country as we look to CASM-X next year, I see Chris in the back of the room. Our finance team is going to have to communicate that really carefully because we will definitely grow the airline. So on a block hour basis, we will continue to grow next year. So the efficiency, the productivity of airline, I expect to stay in place, but just because of the ASMs coming down on the scheduled service side of the house, that metric, in particular, we'll just have to be really, really careful with how we communicate it. But broadly, the efficiency of the airline, our ability to hire pilots, retain pilots, keep people motivated, I think we're in a really good place.

Got it. One of the big themes in the industry this year is premiumization. You've seen some of your peers introduce a business class like product. Obviously, some others have gone to assigned seating and such. Where are you in this evolution? Kind of are there any initiatives in the pipeline?

So there's -- we're being very mindful of it. I would say that we just feel really good about the revenue we're able to sort of attract again, back to this relative comparisons to our peer set. I think we feel really good about the unit revenue, the average fare, the ancillary that we're able to attract today. But we're certainly going stay connected to what's going on. And today, I feel like our airplanes have customer amenities that put us sort of in almost a Southwest part of the world as opposed to the true ULCC segment. And we fly markets, and we have for a long time when we take people to St. Thomas for spring break, we're getting a fair that's a heck of a lot more commensurate with sort of legacy premium airline than $29 to Asheville and those sorts of things. So I think we've done a really good job communicating, developing that relationship with our customers. But as with everything, on Sun Country, it's -- we're monitoring it, and there's nothing to report now. I don't expect any changes, but we'll see how things evolve.

Got it. Speaking of legacy airline, your biggest competitor, obviously, is Delta out of Minneapolis. How have they been kind of targeting that market in that region? And second, kind of as they look to be the premium leader of the industry kind of can you write their coattails a little bit on the yields?

Yes. And so they are very good airline. They have an amazing hub in Minneapolis. So we know -- we really do not compete with them. We really are focused on our leisure customers, price-sensitive leisure customers. That's our niche. And I probably told this stat before, when we think of Minneapolis, it's a point of origin heavy market. It won't surprise people here probably, more people leave Minneapolis on any given day than come in. And so we speak to that clientele really, really well. And our point of origin share in Minneapolis today, we feel right around 20%. Delta on a passenger share basis is about 60%. That's been consistent. Ours has grown pretty dramatically since 2019, but Delta's been very consistent. So we feel like there's pretty good coexistence between us. Where we've achieved our share gains is it's the smaller scale carriers in Minneapolis where we brought a network to market that's really compelling. When I joined in 2019, I think we flew to 40 destinations, nonstop from Minneapolis in any given year. This year, we eclipsed 100 which is pretty unique for ULCC. So they -- but Delta is an aggressive carrier whenever we don't expect to ever have an uncontested nonstop. If we put in a market that they don't serve, our expectation is they're going to compete. That's sort of what you should expect in this business. It's a very competitive business, but I feel like we have really sort of figured out who we are and when you're a price-sensitive leisure traveler and you do your homework in Minneapolis, there's a good chance you're going to show up on Sun Country airplane.

Got it. You mentioned the price sense leisure customer. Obviously, there's a lot of focus on the consumer right now, especially the lower-end consumer results from Walmart and some of the dollar stores. It looks like travel trends are very resilient, but you seeing any kind of cracks or slowdown in that low end customer?

So -- and I harken back to what we were talking about when we came out after our first quarter and sort of announced those -- the results and how we were going to adjust, we certainly, I think, did see some of that, that really price-sensitive customer just -- and it was hard to pick up because there was a lot of capacity in the marketplace as well. But as we sort of look forward, I think the industry picture has just gotten a lot closer to equilibrium as sort of carriers have made those rational capacity decisions and the demand is still there. It's just making sure it's allocated to the right places on the right time today. So I think what you're going to see us be is very, very focus on only flying. The stuff that we absolutely are convinced is going to make -- is going to be profitable and accretive in those off-peak periods. And then in the peak period, just making sure one of the things we're going to be very focused on in '25 is certainly flying to where people want to go. I think we have a good sense for that, but doing it in a really reliable manner. And that's going to be for all 3 of our segments.

Got it. Any questions in the room?

So I know Sun Country has been profitable for about like 8 consecutive quarters, even with cost pressures, inflation, et cetera. Margins have fared pretty well relatively speaking. But how do you kind of see the path back to pre-COVID margins? What does that look like?

I think it -- appreciate the question. I think it really lies in that diversification. And again, I think this is one where it's sort of -- profitability is very much a focus. We take it very, very seriously at all levels of the organization. But it's also sort of taking out some of that volatility as well. So I think that's how we also want to think about it is just on a kind of -- almost on a risk-adjusted basis as well. And so the diversification will certainly help us. I think we feel really good about the adjustments we've made to some of our longer-term contracts. And our capacity allocation I feel really good about that. So I think you're going to continue to see that track record save any just crazy exogenous forces, you're going to see that hold up. And even if in a world where you get some of those exogenous forces and if they're to the downside, our model, we feel really good about it pretty much compared to almost any other.

Just on the improvement you talked about more recently that you're seeing. Is this just capacity element? Or are you also seeing a bit of an uptick in volumes? It sounds as though that's the case. And if so, what do you think is really driving that uptick that we're seeing more recently?

Yes. And I think for us is now we sort of have a lot of clarity close in to an off-peak time period. I'd say it's probably the bigger driver. Where I'm getting excited is just seeing some of our core leisure markets as we look out a little bit further in Minnesota. There's a fall holiday for the schools in the middle part of October, MEA holiday. So just some of the trends we're seeing there into Florida. And as we look farther into the next holidays in the first quarter, just seeing a really strong leisure market. [Audio Gap] demand is there. People are out there purchasing vacations consistent with how they have been. And then the capacity backdrop just gets us closer to where equilibrium would be.

Sorry to belabor the demand point maybe one more time. The Dollar General talked about seeing a very discrete stepdown in Q2 across all of their cohorts, across all geographies. So I guess I was wondering you mentioned one, when you [indiscernible] I've already seen that. I'm wondering whether you guys saw any additional stepdown in Q2 or whether to -- the point that you just made that like actually demand since you guys made those changes has actually started to…

Yes. And demand sort of held in there because we grew the airline, like I would say, at levels that Sun Country at least in this iteration hadn't before. So our second quarter growth was strong double-digit growth. And our load factors hung in there. I would say that there was probably some discounting going on to get folks on the airplane. And so it was just sort of -- there are a lot of things going on. The summer came in nicely. We were very happy with the demand there. And I think it's sort of -- that demand is sort of -- it keeps going, and we feel good about it going forward, but we can't under stress just how good it is to get capacity at a more rational level. It's just -- for this business, it's an important component. And I think, hey, every management team, we can have strategic goals, we can do that sort of stuff. But we need to be rational with what we're putting in the marketplace. And that's why I feel so good, frankly, about our 2025, not to say that we wouldn't be really rational, but it's profit accretive lines of business that's growing, that's going to force capacity discipline on us a little bit. But our brand, our share in Minneapolis, we're going to be able to withstand that and make really good trade-offs. And I think it's going to be great for the stakeholders of Sun Country.

Maybe just bring us home. Obviously, you said you're 40-year-old airline, but recent IPO in 2021. What's your message to investors? Like what are people missing? Obviously, you're a very, very unique story. You're more defensive because of the cargo business, fixed revenue charter. You have pass-throughs on fuel. So is it just getting the story out there? Or kind of what's the...

I think it's getting the story out there. Chris is probably going to turn my mic off. I think it really is hammering home that story to folks that on a risk-adjusted basis, Sun Country is a really unique play in this space. And the dynamics of the business is that low debt, really strong cash production opportunities, just a really sound business with people who are running it for the stakeholders of the company. So -- and we're a really good management team. I don't want anyone to say, "Oh, it's just a boring story." So I think there's capability there that if opportunities become apparent or there's an opportunity to take advantage of something, there's no doubt in my mind that this team could do it as well as any. But the underlying business is just a really, really good business. And I think as we talk to investors, that's just what you want to get across, like you can look at this in any different way, but we should always have a realistic answer for and I love the idea about the profitability. This airline last year, we were really happy to have industry-leading profitability, frankly, in an environment that we shouldn't. And we're doing pretty well this year. And next year, I feel really good about our chances. So it's just -- the bones of the airline are really good. The numbers are good. But I think some of it does come, I hate to say, defensive, but just really strong results in any kind of market conditions.

Looking forward to 2025, Grant. Thanks so much of the time and we'll see you soon.

Appreciate it. Thank you.